Your approach to buying a car can say a lot about your commitment to building financial security, says former CNBC host, best-selling author and award-winning financial advisor Suze Orman, in a recent blog post. And, she writes, "from what I hear and see these days, plenty of you are being down-right dumb when it comes to financing a car purchase."
That's because, unless you buy a car outright or it was gifted to you, the time you're planning to take to pay it off is probably too long.
Data from major credit bureau Experian shows that, in 2016, the average auto loan lasted 68 months, or more than 5 years. The average loan amount: Over $30,000, more than the typical millennial makes in a year. That means the average monthly payment is $503, a considerable, even shocking, amount if you're paying student loans and juggling the other essential high costs of living.
"Are you kidding me?" writes Orman.
Instead of falling in love with a car, fall in love with a retirement or savings account, or a home. "Those are assets that over time may increase in value. A car will never, ever increase in value," she writes. "It is a depreciating asset that loses about 20 percent of its value in the first year. And keeps on falling from there."
Understandably, you may need a car to get to and from work, as well as elsewhere. Still, Orman suggests finding a shorter loan: "A 36-month loan is being financially smart. I will even give you a break if you decide on a 48-month loan. But 70 months or longer? That's nuts."
That said, she writes, you should aim to buy the car, not lease it. She knows that from experience. In an interview with CNBC, she said she leased a BMW 750iL in 1987 to show off to the person she was dating and that decision was "the most stupid thing I've ever done with money." Her monthly payments were $800 and "the truth of the matter is, later, I didn't even like this person."
Self-made millionaire and car aficionado Jay Leno advises against leasing, too. "I always think it's better to buy a car," he tells CNBC. "Everyone seems to lease now. Everyone thinks you can write off this and write off that. But at the end of the lease, you don't have anything."
While monthly lease payments can be lower than loan payments, they too add up. And once you pay off a loan, it's gone for good whereas, if you lease, at the end of your term, the monthly payment will be gone, but your car will be gone, too.
Cars may be pricey, Orman writes, but you have options besides taking out a long loan: "The car you want may be too expensive," but "the car you need can be very affordable. All it takes is a willingness to only shop for cars that make financial sense."
A new car or a used car that you can pay off in three years is a smart way to live within your means, she writes.
If you already have a car and signed loan, look into some refinancing options, especially if you have good credit. A "prime" or "super prime" score could help you with financing. And if you're still working on your score, stick with your current car for "as long as you can," writes Orman.
The less money you have to shell out for a car, the more money you can put toward other important finical responsibilities. And that's a good step toward building financial security.
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Video by Mary Stevens